Principles of Economics

Marshall, Alfred
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London: Macmillan and Co., Ltd.
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8th edition
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§ 1. When discussing the general theory of equilibrium of demand and supply in the last Book, and the main outlines of the central problem of distribution and exchange in the first two chapters of this Book, we left on one side, as far as might be, all considerations turning on the special qualities and incidents of the agents of production. We did not inquire in detail how far the general theories of the relations between the value of an appliance for production and that of the product, which it helps to make, are applicable to the incomes earned by natural abilities, or by skill and knowledge acquired long ago, whether in the ranks of the employers, the employed, or the professional classes. We avoided difficulties connected with the analysis of Profits, paying no attention to the many different scopes which the usage of the marketplace assigns to this term, and even the more elementary term Interest; and we took no account of the influence of varieties of tenure on the form of demand for land. These and some other deficiencies will be made good by more detailed analysis in the following three groups of chapters on demand and supply in relation to labour, to capital and business power, and to land, respectively.


Problems relating to methods of estimating and reckoning earnings, to which the present chapter is devoted, belong mainly to the province of arithmetic or book-keeping: but much error has arisen from treating them carelessly.


§ 2. When watching the action of demand and supply with regard to a material commodity, we are constantly met by the difficulty that two things which are being sold under the same name in the same market, are really not of the same quality and not of the same value to the purchasers. Or, if the things are really alike, they may be sold even in the face of the keenest competition at prices which are nominally different, because the conditions of sale are not the same: for instance, a part of the expense or risk of delivery which is borne in the one case by the seller may in the other be transferred to the buyer. But difficulties of this kind are much greater in the case of labour than of material commodities: the true price that is paid for labour often differs widely, and in ways that are not easily traced, from that which is nominally paid.


There is a preliminary difficulty as to the term "efficiency." When it is said that about equal earnings (or rather equal "net advantages," see above II. IV. 2) are obtained in the long run in different occupations by persons of about equal efficiency, the term "efficiency" must be interpreted broadly. It must refer to general industrial efficiency, as defined above (IV. V. 1). But when reference is made to differences of earning power of different people in the same occupation, then efficiency is to be estimated with special reference to those particular elements of efficiency which are needed for that occupation.


It is commonly said that the tendency of competition is to equalize the earnings of people engaged in the same trade or in trades of equal difficulty; but this statement requires to be interpreted carefully. For competition tends to make the earnings got by two individuals of unequal efficiency in any given time, say, a day or a year, not equal, but unequal; and, in like manner, it tends not to equalize, but to render unequal the average weekly wages in two districts in which the average standards of efficiency are unequal. Given that the average strength and energy of the working-classes are higher in the North of England than in the South, it then follows that the more completely "competition makes things find their own level," the more certain is it that average weekly wages will be higher in the North than in the South*36.


Cliffe Leslie and some other writers have naïvely laid stress on local variations of wages as tending to prove that there is very little mobility among the working-classes, and that the competition among them for employment is ineffective. But most of the facts which they quote relate only to wages reckoned by the day or week: they are only half-facts, and when the missing halves are supplied, they generally support the opposite inference to that on behalf of which they are quoted. For it is found that local variations of weekly wages and of efficiency generally correspond: and thus the facts tend to prove the effectiveness of competition, so far as they bear on the question at all. We shall however presently find that the full interpretation of such facts as these is a task of great difficulty and complexity.


The earnings, or wages, which a person gets in any given time, such as a day, a week, or a year, may be called his time-earnings, or time-wages: and we may then say that Cliffe Leslie's instances of unequal time-wages tend on the whole to support, and not to weaken, the presumption that competition adjusts earnings in occupations of equal difficulty and in neighbouring places to the efficiency of the workers.


But the ambiguity of the phrase, "the efficiency of the workers," has not yet been completely cleared away. When the payment for work of any kind is apportioned to the quantity and quality of the work turned out, it is said that uniform rates of piece-work wages are being paid; and if two persons work under the same conditions and with equally good appliances, they are paid in proportion to their efficiencies when they receive piece-work wages calculated by the same lists of prices for each several kind of work. If however the appliances are not equally good, a uniform rate of piece-work wages gives results disproportionate to the efficiency of the workers. If, for instance, the same lists of piece-work wages were used in cotton mills supplied with old-fashioned machinery, as in those which have the latest improvements, the apparent equality would represent a real inequality. The more effective competition is, and the more perfectly economic freedom and enterprise are developed, the more surely will the lists be higher in the mills that have old-fashioned machinery than in the others.


In order therefore to give its right meaning to the statement that economic freedom and enterprise tend to equalize wages in occupations of the same difficulty and in the same neighbourhood, we require the use of a new term. We may find it in efficiency-wages, or more broadly efficiency-earnings; that is, earnings measured, not as time-earnings are with reference to the time spent in earning them; and not as piece-work earnings are with reference to the amount of output resulting from the work by which they are earned; but with reference to the exertion of ability and efficiency required of the worker.


The tendency then of economic freedom and enterprise (or, in more common phrase, of competition), to cause every one's earnings to find their own level, is a tendency to equality of efficiency-earnings in the same district. This tendency will be the stronger, the greater is the mobility of labour, the less strictly specialized it is, the more keenly parents are on the look-out for the most advantageous occupations for their children, the more rapidly they are able to adapt themselves to changes in economic conditions, and lastly the slower and the less violent these changes are.


This statement of the tendency is, however, still subject to a slight correction. For we have hitherto supposed that it is a matter of indifference to the employer whether he employs few or many people to do a piece of work, provided his total wages-bill for the work is the same. But that is not the case. Those workers who earn most in a week when paid at a given rate for their work, are those who are cheapest to their employers; and they are the cheapest also to the community, unless indeed they overstrain themselves, and work themselves out prematurely. For they use only the same amount of fixed capital as their slower fellow-workers; and, since they turn out more work, each part of it has to bear a less charge on this account. The prime costs are equal in the two cases; but the total cost of that done by those who are more efficient, and get the higher time-wages, is lower than the total cost of that done by those who get the lower time-wages at the same rate of piece-work payment*37.


This point is seldom of much importance in out-of-door work, where there is abundance of room, and comparatively little use of expensive machinery; for then, except in the matter of superintendence, it makes very little difference to the employer, whose wages-bill for a certain piece of work is £100, whether that sum is divided between twenty efficient or thirty inefficient workers. But when expensive machinery is used which has to be proportioned to the number of workers, the employer would often find the total cost of his goods lowered if he could get twenty men to turn out for a wages-bill of £50 as much work as he had previously got done by thirty men for a wages-bill of £40. In all matters of this kind the leadership of the world lies with America, and it is not an uncommon saying there, that he is the best business man who contrives to pay the highest wages.


The corrected law then stands that the tendency of economic freedom and enterprise is generally to equalize efficiency-earnings in the same district: but where much expensive fixed capital is used, it would be to the advantage of the employer to raise the time-earnings of the more efficient workers more than in proportion to their efficiency. Of course this tendency is liable to be opposed by special customs and institutions; and, in some cases, by trades-union regulations*38.


§ 3. Thus much with regard to estimates of the work for which the earnings are given: but next we have to consider most carefully the facts, that in estimating the real earnings of an occupation account must be taken of many things besides its money receipts, and that on the other side of the account we must reckon for many incidental disadvantages besides those directly involved in the strain and stress of the work.


As Adam Smith says, "the real wages of labour may be said to consist in the quantity of the necessaries and conveniences of life that are given for it; its nominal wages in the quantity of money.......The labourer is rich or poor, is well or ill rewarded, in proportion to the real, not to the nominal, price of his labour*39." But the words "that are given for it" must not be taken to apply only to the necessaries and conveniences that are directly provided by the purchaser of the labour or its products; for account must be taken also of the advantages which are attached to the occupation, and require no special outlay on his part.


In endeavouring to ascertain the real wages of an occupation at any place or time, the first step is to allow for variations in the purchasing power of the money in which nominal wages are returned. This point cannot be thoroughly dealt with till we come to treat of the theory of money as a whole. But it may be remarked in passing that this allowance would not be a simple arithmetical reckoning, even if we had perfectly accurate statistics of the history of the price of all commodities. For if we compare distant places or distant times, we find people with different wants, and different means of supplying those wants: and even when we confine our attention to the same time and place we find people of different classes spending their incomes in very different ways. For instance, the prices of velvet, of operatic entertainments and scientific books are not very important to the lower ranks of industry; but a fall in the price of bread or of shoe leather affects them much more than it does the higher ranks. Differences of this kind must always be borne in mind, and it is generally possible to make some sort of rough allowance for them*40.


§ 4. We have already noticed that a person's total real income is found by deducting from his gross income the outgoings that belong to its production; and that this gross income includes many things which do not appear in the form of money payments and are in danger of being overlooked*41.


Firstly, then, with regard to the outgoings. We do not here reckon the expenses of education, general and special, involved in the preparation for any trade: nor do we take account of the exhaustion of a person's health and strength in his work. Allowance for them may be best made in other ways. But we must deduct all trade expenses, whether they are incurred by professional men or artisans. Thus from the barrister's gross income we must deduct the rent of his office and the salary of his clerk; from the carpenter's gross income we must deduct the expenses which he incurs for tools; and when estimating the earnings of quarrymen in any district we must find out whether local custom assigns the expenses of tools and blasting powder to them or their employers. Such cases are comparatively simple; but it is more difficult to decide how large a part of the expenses, which a medical man incurs for house and carriage and social entertainments, should be regarded as trade expenses*42.


§ 5. Again, when servants or shop assistants have to supply themselves at their own cost with expensive clothes, which they would not buy if free to do as they liked, the value of their wages to them is somewhat lowered by this compulsion. And when the employer provides expensive liveries, houseroom and food for his servants, these are generally worth less to them than they cost to him: it is therefore an error to reckon the real wages of domestic servants, as some statisticians have done, by adding to their money wages the equivalent of the cost to their employer of everything that he provides for them.


On the other hand, when a farmer hauls coals free for his men, he chooses, of course, times when his horses have little to do, and the real addition to their earnings is much greater than the cost to him. The same applies to many perquisites and allowances, as, for instance, when the employer allows his men to have without payment commodities which though useful to them, are almost valueless to him on account of the great expenses involved in marketing them; or, again, when he allows them to buy for their own use at the wholesale price commodities which they have helped to produce. When, however, this permission to purchase is changed into an obligation to purchase, the door is open to grave abuses. The farmer who in old times used to compel his men to take from him spoilt grain at the wholesale price of good grain, was really paying them lower wages than he appeared to be. And on the whole when this so-called truck-system prevails in any trade in an old country, we may fairly assume that the real rate of wages is lower that the nominal*43.


§ 6. Next we have to take account of the influences exerted on the real rate of earnings in an occupation by the uncertainty of success and the inconstancy of employment in it.


We should obviously start by taking the earnings of an occupation as the average between those of the successful and unsuccessful members of it; but care is required to get the true average. For if the average earnings of those who are successful are £2000 a year, and of those who are unsuccessful are £400 a year, the average of the whole will be £1200 a year if the former group is as large as the latter; but if, as is perhaps the case with barristers, the unsuccessful are ten times as numerous as the successful, the true average is but £550. And further, many of those who have failed most completely, are likely to have left the occupation altogether, and thus to escape being counted.


And again, though, by taking this average, we obviate the necessity of making any separate allowance for insurance against risk, account generally remains to be taken of the evil of uncertainty. For there are many people of a sober steady-going temper, who like to know what is before them, and who would far rather have an appointment which offered a certain income of say £400 a year than one which was not unlikely to yield £600, but had an equal chance of affording only £200. Uncertainty, therefore, which does not appeal to great ambitions and lofty aspirations, has special attractions for very few; while it acts as a deterrent to many of those who are making their choice of a career. And as a rule the certainty of moderate success attracts more than an expectation of an uncertain success that has an equal actuarial value.


But on the other hand, if an occupation offers a few extremely high prizes, its attractiveness is increased out of all proportion to their aggregate value. For this there are two reasons. The first is that young men of an adventurous disposition are more attracted by the prospects of a great success than they are deterred by the fear of failure; and the second is that the social rank of an occupation depends more on the highest dignity and the best position which can be attained through it than on the average good fortune of those engaged in it. It is an old maxim of statecraft that a Government should offer a few good prizes in every department of its service: and in aristocratic countries the chief officials receive very high salaries, while those of the lower grades are comforted in the receipt of salaries below the market level for similar services by their hopes of ultimately rising to a coveted post, and by the social consideration which in such countries always attends on public officers. This arrangement has the incidental effect of favouring those who are already rich and powerful; and partly for that reason it is not adopted in democratic countries. They often go to the opposite extreme, and pay more than the market rates for their services to the lower ranks, and less to the upper ranks. But that plan, whatever be its merits on other grounds, is certainly an expensive one.


We may next consider the influence which inconstancy of employment exerts on wages. It is obvious that in those occupations in which employment is irregular, the pay must be high in proportion to the work done: the medical man and the shoeblack must each receive when at work a pay which covers a sort of retaining fee for the time when he has nothing to do. If the advantages of their occupations are in other respects equal, and their work equally difficult, the bricklayer when at work must be paid a higher rate than the joiner, and the joiner than the railway guard. For work on the railways is nearly constant all the year round; while the joiner and the bricklayer are always in danger of being made idle by slackness of trade, and the bricklayer's work is further interrupted by frost and rain. The ordinary method of allowing for such interruptions is to add up the earnings for a long period of time and to take the average of them; but this is not quite satisfactory unless we assume that the rest and leisure, which a man gets when out of employment, are of no service to him directly or indirectly*44.


This assumption may be fairly made in some cases; for waiting for work often involves so much anxiety and worry that it causes more strain than the work itself would do*45. But that is not always so. Interruptions of work that occur in the regular course of business, and therefore raise no fears about the future, give opportunity for the system to recruit itself and lay in stores of energy for future exertions. The successful barrister, for instance, is subject to a severe strain during some parts of the year; and that is itself an evil. But when allowance has been made for it, he may be regarded as losing very little by being prevented from earning any fees during the legal vacations*46.


§ 7. Next we must take account of the opportunities which a man's surroundings may afford of supplementing the earnings which he gets in his chief occupation, by doing work of other kinds. And account may need to be taken also of the opportunities which these surroundings offer for the work of other members of his family.


Many economists have even proposed to take as their unit the earnings of a family: and there is much to be said for this plan with reference to agriculture and those old-fashioned domestic trades in which the whole family works together, provided that allowance is made for the loss resulting from any consequent neglect by the wife of her household duties. But in modern England trades of this kind are exceptional; the occupation of the head of a family seldom exerts much direct influence on those of its other members, except those of his sons whom he introduces into his own trade; though of course when the place in which he works is fixed, the employments, to which his family can get easy access, are limited by the resources of the neighbourhood.


§ 8. Thus then the attractiveness of a trade depends on many other causes besides the difficulty and strain of the work to be done in it on the one hand, and the money-earnings to be got in it on the other. And when the earnings in any occupation are regarded as acting on the supply of labour in it, or when they are spoken of as being its supply price, we must always understand that the term earnings is only used as a short expression for its "net advantages*47." We must take account of the facts that one trade is healthier or cleanlier than another, that it is carried on in a more wholesome or pleasant locality, or that it involves a better social position; as is instanced by Adam Smith's well-known remark that the aversion which many people have for the work of a butcher, and to some extent for the butcher himself, raises earnings in the butchers' trade above those in other trades of equal difficulty.


Of course individual character will always assert itself in estimating particular advantages at a high or a low rate. Some persons, for instance, are so fond of having a cottage to themselves that they prefer living on low wages in the country to getting much higher wages in the town; while others are indifferent as to the amount of houseroom they get, and are willing to go without the comforts of life provided they can procure what they regard as its luxuries. This was the case, for example, with a family of whom the Royal Commission on the Housing of the Working Classes in 1884 were told: their joint earnings were £7 a week, but they chose to live in one room, so as to be able to spend money freely on excursions and amusements.


Personal peculiarities, such as these, prevent us from predicting with certainty the conduct of particular individuals. But if each advantage and disadvantage is reckoned at the average of the money values it has for the class of people who would be likely to enter an occupation, or to bring up their children to it, we shall have the means of estimating roughly the relative strengths of the forces that tend to increase or diminish the supply of labour in that occupation at the time and place which we are considering. For it cannot be too often repeated that grave errors are likely to result from taking over an estimate of this kind based on the circumstances of one time and place, and applying it without proper precaution to those of another time or another place.


In this connection it is interesting to observe the influence of differences of national temperament in our own time. Thus in America we see Swedes and Norwegians drift to agriculture in the North-west, while the Irish, if they go on the land at all, choose farms in the older Eastern States. The preponderance of Germans in the furniture and the brewing industries; of Italians in railway building; of Slavs in meat packing and in some groups of mines, and of Irish and French Canadians in some of the textile industries of the United States; and the preference of the Jewish immigrants in London for the clothing industries and for retail trade—all these are due partly to differences in national aptitudes, but partly also to differences in the estimates that people of different races form of the incidental advantages and disadvantages of different trades.


Lastly, the disagreeableness of work seems to have very little effect in raising wages, if it is of such a kind that it can be done by those whose industrial abilities are of a very low order. For the progress of science has kept alive many people who are unfit for any but the lowest grade of work. They compete eagerly for the comparatively small quantity of work for which they are fitted, and in their urgent need they think almost exclusively of the wages they can earn: they cannot afford to pay much attention to incidental discomforts, and indeed the influence of their surroundings has prepared many of them to regard the dirtiness of an occupation as an evil of but minor importance.


Hence arises the paradoxical result that the dirtiness of some occupations is a cause of the lowness of the wages earned in them. For employers find that this dirtiness adds much to the wages they would have to pay to get the work done by skilled men of high character working with improved appliances; and so they often adhere to old methods which require only unskilled workers of but indifferent character, and who can be hired for low (Time-) wages, because they are not worth much to any employer. There is no more urgent social need than that labour of this kind should be made scarce and therefore dear.

Notes for this chapter

About fifty years ago correspondence between farmers in the North and the South of England led to an agreement that putting roots into a cart was an excellent measure of physical efficiency: and careful comparison showed that wages bore about the same proportion to the weights which the labourers commonly loaded in a day's work in the two districts. The standards of wages and of efficiency in the South are perhaps now more nearly on a level with those in the North than they were then. But the standard trade union wages are generally higher in the North than in the South: and many men, who go North to reach the higher rate, find that they cannot do what is required, and return.
This argument would be subject to corrections in cases in which the trade admitted of the employment of more than one shift of workpeople. It would often be worth an employer's while to pay to each of two shifts as much for an eight hours' day as he now pays to one shift for a ten hours' day. For though each worker would produce less, each machine would produce more on the former than on the latter plan. But to this point we shall return.
Ricardo did not overlook the importance of the distinction between variations in the amount of commodities paid to the labourer as wages, and variations in the profitableness of the labourer to his employer. He saw that the real interest of the employer lay not in the amount of wages that he paid to the labourer, but in the ratio which those wages bore to the value of the produce resulting from the labourer's work: and he decided to regard the rate of wages as measured by this ratio: and to say that wages rose when this ratio increased, and that they fell when it diminished. It is to be regretted that he did not invent some new term for this purpose; for his artificial use of a familiar term has seldom been understood by others, and was in some cases even forgotten by himself. (Compare Senior's Political Economy, pp. 142-8.) The variations in the productiveness of labour which he had chiefly in view were those which result from improvements in the arts of production on the one hand, and on the other from the action of the law of diminishing return, when an increase of population required larger crops to be forced from a limited soil. Had he paid careful attention to the increase in the productiveness of labour that results directly from an improvement in the labourer's condition, the position of economic science, and the real wellbeing of the country, would in all probability be now much further advanced than they are. As it is, his treatment of wages seems less instructive than that in Malthus' Political Economy.
Wealth of Nations, I. V.
The Report of the Poor Law Commissioners on the Employment of Women and Children in Agriculture, 1843, p. 297, contains some interesting specimens of yearly wages paid in Northumberland, in which very little money appeared. Here is one:—10 bushels of wheat, 30 of oats, 10 of barley, 10 of rye, 10 of peas; a cow's keep for a year; 800 yards of potatoes; cottage and garden; coal-shed; £3. 10s. in cash; and 2 bushels of barley in lieu of hens.
See II. IV. 7.
This class of questions is closely allied to those raised when discussing the definitions of Income and Capital in Book II.; where a caution has already been entered against overlooking elements of income that do not take the form of money. Earnings of many even of the professional and wage-receiving classes are in a considerable measure dependent on their being in command of some material capital.
Employers, whose main business is in a healthy condition, are generally too busy to be willing to manage such shops unless there is some strong reason for doing so; and consequently in old countries those who have adopted the Truck system, have more often than not done so with the object of getting back by underhand ways part of the wages which they have nominally paid. They have compelled those who work at home to hire machinery and implements at exorbitant rents; they have compelled all their workpeople to buy adulterated goods at short weights and high prices; and in some cases even to spend a very large part of their wages on goods on which it was easiest to make the highest rate of profits, and especially on spirituous liquors. Mr Lecky, for instance, records an amusing case of employers who could not resist the temptation to buy theatre tickets cheap, and compel their workpeople to buy them at full price (History of the Eighteenth Century, VI. p. 158). The evil is however at its worst when the shop is kept not by the employer, but by the foreman or by persons acting in concert with him; and when he, without openly saying so, gives it to be understood that those, who do not deal largely at the shop, will find it difficult to get his good word. For an employer suffers more or less from anything that injures his workpeople, while the exactions of an unjust foreman are but little held in check by regard for his own ultimate interest.

On the whole evils of this kind are now relatively small. And it must be remembered that in a new country large businesses often spring up in remote places, in which there is no access to even moderately good retail stores or shops; and then it may be necessary that the employers should supply their workpeople with nearly everything they want, either by paying part of their wages in the form of allowances of food, clothing, etc., or by opening stores for them.

These considerations are specially important with regard to piece-work; the rates of earnings being in some cases much reduced by short supplies of material to work on, or by other interruptions, avoidable or unavoidable.
The evils of irregularity of employment are trenchantly stated in a lecture on that subject given by Prof. Foxwell in 1886.
Workers in the higher grades are generally allowed holidays with pay; but those in the lower grades generally forfeit their pay when they take holidays. The causes of this distinction are obvious; but it naturally raises a feeling of grievance of a kind, to which the inquiries by the Labour Commission gave vent. See e.g. Group B. 24, 431-6.
See II. IV. 2.

End of Notes

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